Texas Commercial Law Firm

The BFP decision centers on Bankruptcy Code §548(a)(2)(A), which provides that sales of the debtor's assets, (including foreclosure sales of real estate) occurring during the year preceding bankruptcy may be set aside by the bankruptcy trustee if the debtor does not receive “reasonably equivalent value” for the property. Section 548(a)(2)(A) was written to prevent one creditor from gaining an unfair advantage, or a “preference” by obtaining an asset in exchange for less than its “reasonably equivalent value” during the year preceding bankruptcy. Such a transfer would benefit the recipient of the transfer to the detriment of other claimants to the bankruptcy estate. Unfortunately, the Bankruptcy Code does not define the term “reasonably equivalent value”. In interpreting the term, the Court in Durrett decided that less than 70% of an asset's fair market value was less than the asset's reasonably equivalent value and subjected the sale to being set aside. Although the Durrett decision was limited to the facts of that particular case, lacking any other guidance, it became the standard followed by and large by the lending community in their foreclosure bid calculations.

Critics of Durrett argued that it was an arbitrary rule imposed by federal courts in conflict with long established state foreclosure standards. Rather than referring to state law and established precedent in determining what constitutes a valid foreclosure sale, Durrett superimposed a federal standard, effectively displacing state law on this issue. Durrett's practical effect was to make foreclosure property unmarketable for a period of one year from the date of the foreclosure sale if less than 70% of the fair market value was bid for the property. Title companies routinely included a “Durrett” exception to coverage for foreclosed properties.

Next Page>>> |Previous Page>>>